Pension funds and life insurers in Brazil and China could be "seriously" underestimating the financial costs of rising longevity, according to the Organisation for Economic Cooperation and Development, while the UK and the Netherlands are the best-prepared.

China's mortality assumptions need to be more realistic

The OECD has produced an analysis of its member countries, comparing regulatory requirements and market practice on predicting and preparing for rising life expectancy.

Pension funds and insurance companies that provide annuities - contracts that promise to pay an annual income for life - are both exposed to the financial risk that people live longer than expected.

The OECD found that while some countries, such as the UK, Netherlands, Canada, Chile and France, require both pension funds and insurers to factor in expected or predicted improvements in future longevity, most do not. Pension funds are generally less regulated around the world than annuity providers.

China, Brazil, Korea, Japan, Spain and Switzerland were among those countries where regulators did not require any provision to be made for rising life expectancy.

Pablo Antolin-Nicolás, principal economist and head of the OECD's private pensions unit, presented his findings at the World Pensions Council's investment conference in Hong Kong earlier today.

He said: "In practice, of course, most pension funds and insurers around the world do factor in expected improvements in longevity. Are they therefore free of longevity risk? It depends on whether they are provisioning enough."

To answer that question, Antolin-Nicolás and his team then compared the market-practice mortality assumptions in each country to broad, country-level death-rate assumptions based on national population data, combined with four different popular longevity models.

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They found that in China and Brazil, two of the developing world's biggest economies, the life expectancy predictions used by pension funds and insurers were more than 10% below what the general models indicated they should be.

In Chile - one of the countries where regulators require the funds and insurers to make provision for improvements - there was still a "significant" underestimation of 5% to 10% below the models. In the US and Japan, pension funds were making significant underestimates, while insurers were more realistic.

Only two countries, the UK and the Netherlands, had "little to no longevity risk" in both pension funds and insurers. German insurers were also rated safe on the OECD's measures.

Antolin-Nicolás said: "There is emerging global agreement among regulators that they should require pension funds to update mortality assumptions regularly. There is also agreement that they should take into account expected future improvements.

"But there is not agreement on the type of models that should be used to do this. This is where the problem lies. Governments also need to provide the data. They are the only ones that have it."